Latin America braces for FX rollercoaster in Trump’s first days: poll

A woman is seen next to a board displaying the exchange rate for Mexican peso and U.S. dollars at a foreign exchange house in Mexico City

By Silvio Cascione

BRASILIA (Reuters) – Uncertainty over the path of Latin American currencies has spiked following the surprise election of Donald Trump to the White House, with chances of more sudden losses against the U.S. dollar in coming months, a Reuters poll showed.

Strategists revised their exchange rate forecasts sharply down for the year ahead, especially for the Mexican peso, seen as particularly vulnerable due to Trump’s proposals to build a border wall and curtail trade.

“The first 100 days of Trump’s new administration should be of volatility for nearly all emerging market currencies,” said Tatiana Pinheiro, an economist with Santander in Sao Paulo.

The Mexican peso is expected to trade at 20.77 per dollar in 12 months, near an all-time low of 21.39 set in the week of Trump’s Nov. 8 victory.

The range of forecasts was much wider than in previous polls, in a sign markets have very little conviction over the outlook for the peso after it lost more than 10 percent in a couple of days after Trump’s win.

Estimates for the peso in a year varied between 18.83 and 27.67 per dollar. Two Reuters polls in the days before the U.S. election correctly predicted the peso was poised to weaken to between 20.5-21 per dollar initially in the event of a Trump victory.

Median forecasts for the Brazilian real and the Colombian peso in 12-months time were also down to 3.49 and 3,150 per dollar respectively.

Instability in Latin American currency markets has prompted Mexico to raise interest rates and Brazil to moderate the pace of rate cuts, in a blow to consumers and businesses. Brazil is struggling to emerge from its worst recession in eight decades, with 12 million unemployed, while Mexico is slowing down at a delicate moment for President Enrique Peña Nieto.

“There is a busy electoral calendar in 2017 (local elections) and 2018 (federal elections, including president) and risks are for a repudiation of the establishment as we have seen around the world,” analysts with Bank of America Merrill Lynch wrote in a research note.

A recent spike in oil prices following an OPEC agreement to cut production could help oil-producing countries such as Colombia. However, most analysts in the poll reckoned chances of further cuts to their forecasts were higher than the opposite.

The scenario of a sustained dollar rally in Latin America is consistent with the outlook for other currency markets, given expectations for a faster pace of interest rate hikes in the United States under Trump.

However, if volatility subsides earlier than expected, the Brazilian real could outperform other emerging market currencies because interest rates, at 13.75 percent, remain very high despite two recent cuts by the central bank.

“In a world of negative real yields … a case can be made for further appreciation given the backdrop of a conservative central bank in tandem with progress on the approval of key fiscal reform bills. This could potentially cause the real to overshoot toward 3.00,” said Alberto Ramos, head of Latin America economic research at Goldman Sachs.